Marico -- Company affirmed our key concerns ::Macquarie Research,

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Marico
Company affirmed our key concerns
Event
 Marico has today released an investor update outlining risks to their near-term
earnings on account of slower consumer spending and continued raw material
(RM) pressure, primarily copra (40% of Marico’s RM costs). In our last note on
Marico, we had highlighted these risks and mentioned that the streets’
earnings expectations were very high. We maintain our contrarian UP rating
with a revised TP of Rs130 from Rs138 earlier.
Impact
 Volume growth sustainability at risk. Marico has reported strong 14%
organic volume growth in 1QFY12 (10% in Parachute rigid packs and 32% in
light hair oils) on account of high promotional schemes in light hair oil. We
think this promotion-led volume growth is unsustainable in a relatively mature
category like hair oil (>90% penetration) where future growth is at great risk
due to changing consumer behaviour and preferences. Volume growth is also
getting impacted due to stress on consumers’ budgets given high inflation.
 Copra prices didn’t fall as much as was expected by the street. Marico
has indicated that there could be a structural shift in Copra prices (up 80%
YoY) as it is increasingly getting linked with fuel oil prices. This is inline with
our argument that the strength in copra prices is not due to a supply-demand
imbalance and there was no apparent reason for copra prices to fall, unless
there is a sharp drop in global fuel oil prices.
 International business yet to see stability. Marico’s international business,
particularly the MENA region, is likely to remain under pressure due to a
volatile political environment in the region and local governments restricting
companies taking price increases. International business contributes ~25%
(half of this from the MENA region) to consolidated sales.
 Margins to remain under pressure. Over the last five quarters, Marico has
been cutting advertising and promotional (A&P) expenses to offset the RM
cost pressures. We believe there is little scope for any further cut in A&P, as
their A&P expense is already the lowest in the industry and any further cut is
likely to impact growth. Given the challenging growth environment, Marico is
unlikely to take any further price increases over the next two quarters.
Earnings and target price revision
 We cut FY12E/FY13E EPS forecast by 10% and 5% respectively. Our EPS
estimate for FY12E is 5% below consensus. We cut TP to Rs130 from Rs138.
Price catalyst
 12-month price target: Rs130.00 based on a DCF methodology.
 Catalyst: 1) Quarterly earnings, and 2) slower volume growth
Action and recommendation
 We believe uncertainties on raw material inflation and a challenging Middle
East business environment will weigh on Marico’s performance in FY12E.